Facebook Seeks to Raise Up to $5 Billion in Biggest Internet IPO on Record

By Brian Womack and Ari Levy -
Feb 2, 2012

Facebook Inc. (FB), the social-networking
website that in eight years changed the way the world
communicates, filed to raise $5 billion in the largest Internet
initial public offering on record.

Facebook, whose meteoric rise spawned an Oscar-winning film
and captivated Wall Street, yesterday named Morgan Stanley as
the lead underwriter on the IPO, while reporting a 24-fold
increase in sales over the past four years to $3.71 billion in
2011.

The planned IPO dwarfs Google Inc. (GOOG)’s 2004 offering and
tests whether social-networking providers deserve market values
that rival such established companies as McDonald’s Corp. (MCD) and
Caterpillar Inc. The Menlo Park, California-based company is
considering a valuation of $75 billion to $100 billion, people
with knowledge of the matter said last week.

“The $100 billion valuation that’s being tossed around
just puts it at a level we’ve never seen,” said Jeffrey Sica,
chief investment officer of Morristown, New Jersey-based Sica
Wealth Management LLC, which oversees $1 billion. “They have to
be able to show that not only do they deserve to be at that
level, but they have multiple channels to create new revenue.”

Sales Surge

Co-founded in 2004 by Mark Zuckerberg, now 27, Facebook has
grown into the world’s dominant social-networking site,
squelching competitors such as MySpace Inc. with its more than
800 million users. While Facebook’s sales almost doubled last
year, the company faces increasing competition from rivals such
as Google, which debuted its own social-networking service last
year, and short-message social site Twitter Inc., the filing
shows.

A $100 billion market capitalization would value Facebook
at 26.9 times trailing 12-month sales, more than double Google’s
valuation when the search-engine operator went public in 2004.
Facebook recruited Chief Operating Officer Sheryl Sandberg, a
former Google executive, in 2008 to help expand the company
globally.

Facebook didn’t specify the number or price of shares it
will offer, and the $5 billion amount is a placeholder used to
calculate fees and may change. The U.S. Securities and Exchange
Commission’s public website suffered a slowdown yesterday as
traffic surged, forcing the agency to bring on additional
capacity, according to spokesman John Nester.

Facebook Bankers

The stock would trade under the symbol FB on either the
Nasdaq Stock Market or the New York Stock Exchange. The company
plans to use the proceeds for working capital and other general
corporate purposes.

Net income last year surged by almost two-thirds to $1
billion, the filing showed. Last year, Facebook said it expects
U.S. regulators to require that it disclose financial results by
April 30, 2012, if the company hadn’t gone public by then.
Facebook decided to wait until 2012 for its IPO to give Chief
Executive Officer Zuckerberg more time to gain users and boost
sales, people familiar with the matter said in 2010.

Zuckerberg is the company’s top holder with 28.4 percent of
the shares, the filing shows. At the $100 billion market value,
Zuckerberg’s stake would be worth $28.4 billion, making him
richer than Google’s co-founders and almost on par with Oracle
Corp. founder Larry Ellison.

Hacker Way

Zuckerberg also used the filing to outline “the hacker
way,” in a letter more than 2,000 words long, saying Facebook
would be guided by that principle and not solely profit. In the
document, he explains the goal of making his social network as
transformative a communication tool as the printing press or
television.

The filing also underscored his influence on the company’s
direction, as Zuckerberg has proxy agreements with fellow
stockholders that potentially give him voting control over more
than half the shares. That may prove troubling to investors who
want more of a say, said Charles Elson, a University of Delaware
corporate-governance professor.

Accel Partners remains the top outside stakeholder with
11.4 percent of the investor votes, while Dustin Moskovitz, one
of Zuckerberg’s co-founders, holds 7.6 percent voting power.

Facebook would follow a crop of social-media companies that
went public in 2011, the biggest year for U.S. Internet IPOs in
more than a decade, according to Bloomberg data. Nineteen
companies raised $6.6 billion in 2011, the most since 101 raised
$11 billion in 2000, the data show. Professional-networking site
LinkedIn Corp. (LNKD), music-streaming service Pandora Media Inc.,
daily-deal site Groupon Inc. and social-gaming company Zynga
Inc. all sold shares last year.

Risk Factors

In outlining its potential risks in the filing, Facebook
cited hacker attacks, regulatory scrutiny, a shift to mobile
technology and rivals such as Google+. The company also said it
would face competition in China if it manages to gain access to
that market, where its site is currently blocked.

Facebook is increasing its focus on mobile technology to
take advantage of the shift to smartphones and tablets. It
expects its next 1 billion users to come mainly from mobile
devices, rather than desktop computers.

The company made at least 10 acquisitions in 2011,
including group-messaging service Beluga in March. In addition
to buying startups, Facebook has enabled hundreds of others to
get off the ground by offering an easy, cheap and fast way for
them to reach millions of potential customers, said Shervin Pishevar, a managing director at Menlo Ventures in Menlo Park,
California.

Top Investors

“There will be a lot of $1 billion-plus companies built on
these platforms,” said Pishevar, who owns Facebook shares.

Venture firm Accel Partners first led a $12.7 million
investment in Facebook in 2005. Other investors include
Microsoft Corp. and PayPal co-founder Peter Thiel, as well as
Greylock Partners.

As the site’s popularity grew, banks, hedge funds and
mutual fund companies started buying stock. In January 2011,
Facebook said it raised $1.5 billion in a financing round led by
Goldman Sachs that valued the company at $50 billion. Goldman
Sachs, funds managed by the firm, and Digital Sky Technologies
bought $500 million of stock, while Goldman Sachs offered $1
billion of shares to non-U.S. clients.

While Facebook has steadily added users since its creation,
it has faced increased scrutiny over its protection of user
data. In November, the company agreed to settle privacy
complaints with the Federal Trade Commission. The move may help
allay criticism that it doesn’t do enough to shield the
information it prods users into sharing.